Call to highlight risks in company reports

Corporates should highlight major issues, rather than just listing risks in a
bland way, an influential accounting body has said.

The recommendation is one of several made by the Accounting Standards Board
in its first review of narrative reporting by UK-listed companies. The review
says company reports should contain more disclosure of forward-looking
information, improve their descriptions of resources, check their principal
risks and uncertainties more carefully, and better identify their key
performance indicators.

The board analysed the annual reports of 23 listed companies, 15 of which, at
the time of publication of their annual report, were members of the FTSE 100
index. Four were within the FTSE 250 index, and four smaller quoted companies
were in the FTSE Small Capitalisation index.

The review took into account work by other organisations in the industry –
including Deloitte, Radley Yeldar, PricewaterhouseCoopers, Black Sun, The
Virtuous Circle, ACCA and the Association of British Insurers.

It found that, while most companies were good at describing their strategy
and current performance, they fared poorly when providing detailed information
about the future.

The ASB also noted that areas of good reporting included descriptions of
current development and business performance, with an increase in the reporting
of environmental, employee and social issues.

The review showed that quoted companies adopted the principles of the ASB’s
reporting statement on the Operating and Financial Review more widely, with this
being higher for the larger market capitalisation companies in the FTSE 100.

Companies with a smaller market capitalisation, with a turnover of between
£5m and £500m a year, were less likely to produce an OFR.

ASB chairman Ian Mackintosh said narrative reporting is an increasingly
important feature of corporate reports, providing an opportunity for directors
to set out a clear and balanced analysis of the strategic position and
directions. ‘It is pleasing to see that many companies are reporting beyond
simple compliance with the law and moving towards best practice,’ he said.

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